Banks – Q3 2022 Earnings Season Themes

Loan growth: Recent H.8 data and management commentary has generally indicated continued loan growth in the third quarter, although at a lower rate than during the first half of the year. However, there are notable differences in loan demand across asset classes. While it appears that demand for C&I loans continues to be strong, higher interest rates are having an impact on demand for other asset classes, such as certain areas of CRE and multifamily. The loan growth for individual banks will likely be determined by their ability to capitalize on the areas where demand remains strong, as well as any reduction in headwind they are seeing from lower levels of payoffs. As always, there will be a high level of interest in how loan pipelines are trending and if banks are seeing a more meaningful decline in pipelines as interest rates continue to rise.

Loan pricing: As loan growth becomes more challenging, there will be interest in how banks are approaching loan pricing and if they are able to meaningfully raise pricing while still generating their targeted level of growth. The loan growth and average rates on new loan production in the third quarter will be indicative of the competitive environment that a bank is seeing in its markets, as well as its ability to win business without being the lowest-priced offer. As loan pricing increases, many banks will also reach the inflection point where new loans are coming on the books at higher rates than what is paying off, which would reverse one of the headwinds to NIM expansion that banks have faced for the past few years.

Deposit costs: In general, deposit costs were well controlled during the second quarter, but many banks indicated that it would become more challenging in the third quarter, particularly as deposit growth has slowed or balances have started to decline for some banks. Accordingly, the third quarter will provide a better picture of the quality of a bank’s deposit base and ability to keep deposit relationships without meaningfully increasing rates. During the first half of the year, many banks were able to use their excess liquidity to fund deposit outflows from more rate-sensitive customers, but now much of that excess liquidity has been utilized and loan-to-deposit ratios have increased. Analysts and investors will be closely scrutinizing third quarter deposits costs to help determine which banks are best positioned to realize lower through-the-cycle deposit betas and more NIM expansion.

Credit quality: Management commentary during the third quarter has generally pointed to asset quality remaining strong, although concern is growing around consumer lending, particularly to lower-quality borrowers. Investors and analysts will want to see if banks are seeing signs of deterioration in consumer portfolios and will likely be interested in delinquency trends. There will also be interest in how banks view their level of reserves in light of the potential recessionary environment and which management teams are choosing to be proactive in building reserve levels to an even larger degree than what is dictated by current economic forecasts.

Fee income: From mortgage banking to wealth management to deposit service charges, 2022 has proven to be a very challenging year for keeping the contributions of most fee-generating areas stable, let alone generating growth. The operating environment continues to be difficult for fee-generating businesses, and investors and analysts will be interested in getting updated forecasts for these areas, as well as hearing about any initiatives that banks have to develop new sources of fee income or offset the pressure on existing businesses by growing the customer base or expanding into new markets.

Mergers and acquisitions: Through the first half of 2022, only 84 bank acquisitions were announced, according to S&P Global data. That put the industry on pace for a total of 168 deals in all of 2022, well below last year’s tally of 206. Many banks have provided a number of reasons for why they are not interested in pursuing M&A transactions at the present time: heightened regulatory scrutiny that is causing delays in approval timelines; uncertainty in the economic environment leading to a more cautious approach to M&A; lower bank valuations making deal economics less attractive; and a focus on continuing to integrate or capture synergies from previous deals. Management teams should be prepared to answer questions about whether they are still interested in M&A in the current environment or if they intend to remain on the sidelines for now.